Mortgage Mods: Congressman Prefers Coercion over Cooperation
The recent focus in Washington on mortgage modifications once again illustrates one of the most fundamental flaws in current political debate: the notion of using government to threaten or force the “voluntary” transfer of wealth from one group of citizens to another.
Just this week Rep. Barney Frank warned the banking industry if they don’t “voluntarily” do more to reduce foreclosures, Congress will step in and make them do so, by allowing bankruptcy judges to re-write mortgage contracts. This proposal is really nothing more an ex poste transfer of wealth from investors in mortgage backed assets to borrowers.
Of course, Rep. Frank and others respond that they are only trying to “bring lenders to the table” in order to keep negotiations going. In the words of many “consumer” advocates, this is just a “stick” to the motivate the lenders. I could think of few things more offensive to a free society. In a government truly constituted on the notion of the common good or general welfare, it would be no more appropriate to use the stick of the state on lenders than it would be on borrowers. Government quite simply should not take sides in purely private disputes.
One would think that if anyone could understand the principle that government should not interfere in the private, voluntarily entered relationships of consenting adults, it should be Mr. Frank.
Senate Votes to End Production of F-22 Raptor
As I have written previously, President Obama and the members of Congress who voted to kill funding for the F-22 did the right thing.
The Washington Post reports:
The Senate voted Tuesday to kill the nation’s premier fighter-jet program, embracing by a 58 to 40 margin the argument of President Obama and his top military advisers that more F-22s are not needed for the nation’s defense and would be a costly drag on the Pentagon’s budget in an era of small wars and counterinsurgency efforts.
While this vote marks a step in the right direction, the fight isn’t over. The F-22’s supporters in the House inserted additional monies in the defense authorization bill, and the differences will need to be reconciled in conference. But the vote for the Levin-McCain amendment signals that Congress will take seriously President Obama and Secretary Gates’ intent to bring some measure of rationality to defense budgeting.
The Raptor’s whopping price tag— nearly $350 million per aircraft counting costs over the life of the program— and its poor air-to-ground capabilities always undermined the case for building more than the 187 already programmed.
In the past week, Congress has learned more about the F-22’s poor maintenance record, which has driven the operating costs well above those of any comparable fighter. And, of course, the plane hasn’t seen action over either Iraq or Afghanistan, and likely never will.
Beyond the F-22 and the Joint Strike Fighter, we need a renewed emphasis in military procurement on cost containment. This can only occur within an environment of shrinking defense budgets. Defense contractors who are best able to meet stringent cost and quality standards will win the privilege of providing our military with the necessary tools, but at far less expense to the taxpayers. And those who cannot will have to find other business.
Some Thinking on “Cyber”
Last week, I had the opportunity to testify before the House Science Committee’s Subcommittee on Technology and Innovation on the topic of “cybersecurity.” I have been reluctant to opine on it because of its complexity, but I did issue a short piece a few months ago arguing against government-run cybersecurity. That piece was cited prominently in the White House’s “Cyberspace Policy Review” and — blamo! — I’m a cybersecurity expert.
Not really — but I have been forming some opinions at a high level of generality that are worth making available. They can be found in my testimony, but I’ll summarize them briefly here.
Mortgage ‘Safe Harbor’ Anything But Safe
After the Senate’s rejection last week of allowing bankruptcy judges to re-write mortgage contracts, the so called “cramdown” provisions, it was starting to look as if the Senate cared about respecting private contracts. Sadly, such concern has been short-lived.
Tucked away in the mortgage bill is a provision that gives servicers of mortgages, that is, the entities that collect payments and perform modifications on behalf of the actual investors in mortgages, a “safe harbor” from any litigation by investors if the servicer chooses to follow the interests of the borrower or the government, rather than fulfilling their fiduciary duty to the investors.
Supporters of the safe harbor claim that too many foreclosures have taken place due to contractual restrictions on the ability of servicers to modify mortgages in a manner that would allow borrowers to stay in their homes. Most pooling and servicing agreements allow mortgage modifications without the investors’ approval if the modification increases the net present value of the mortgage. However, if the mortgage modification resulted in a loss to the investor, over what they would recover in a foreclosure, then they are not allowed under current contracts. The safe harbor intends to fix this “problem” by allowing the servicer to impose additional losses on investors, as long as that servicer follows President Obama’s foreclosure plan.
Allowing parties to a contract to ignore their contractual obligations as long as they sign-on to presidential initiatives is a dangerous precedent, and one that will ultimately raise the cost of entering into and enforcing contracts.
As these costs will have to be borne by someone, it is likely in the future that these efforts at undermining contracts in our credit markets will result in higher interest rates for all borrowers.
The Politics of Budget-Cutting
In Washington, the symbolic almost always trumps the substantive. Thus, legislators complain, for good reason, about pork and earmarks, which ran about $35 billion at their maximum, and ignore entitlements, which entail some $100 trillion in unfunded liabilities.
So it is with President Obama. He continues the endless bailouts, which cumulatively now run around $13 trillion. He proposed a $3.6 trillion budget and will leave us with a $1.4 trillion deficit next year–and nearly $5 trillion in additional debt on top of the massive deficits already projected over the coming decade. But he asked his Cabinet officers to chop $100 million in administrative expenses.
And he says he doesn’t need a new helicopter. Fiscal responsibility in action.
Alas, the helicopter, while costing billions, isn’t an easy budget target.
Reports the New York Times:
At a Washington conference on fiscal responsibility in February, President Obama tried to set the tone by saying he did not need the new costly presidential helicopters that had been ordered by the Bush administration.
“The helicopter I have now seems perfectly adequate to me,” he said to laughter. On a more serious note, he added, “I think it is an example of the procurement process gone amok. And we’re going to have to fix it.”
But the president is learning that in the world of defense contracting, frugality can be expensive. Some lawmakers and military experts warn that his effort to avoid wasting billions of dollars could end up doing just that.
The administration’s plan to halt the $13 billion helicopter program, announced this month, will leave the government with little to show for the $3.2 billion it has spent since the Bush administration set out to create a futuristic craft that could fend off terrorist attacks and resist the electromagnetic effects of a nuclear blast.
Critics say the Pentagon would also spend at least $200 million in termination fees and perhaps hundreds of millions to extend the life of today’s aging fleet. As a result, several influential lawmakers and defense analysts are now calling for a compromise that would salvage a simpler version of the helicopter that is already being tested.
They say it could be a more palatable alternative in tough economic times than seeking new bids for a more advanced craft, which has proved difficult to develop.
No wonder Washington is known as a place where everything about government is permanent. Once you start spending money on a program, it becomes extremely hard to stop. Part of that is the political dynamic of interest groups, the problem so well dissected by the Public Choice economists. And part of it is legal and procedural. Contracts are let, cancellation fees are due. It’s bad to waste money on a gold-plated helicopter. It seems even worse to waste money developing a gold-plated helicopter, and then getting nothing at all by canceling it.
There is, however, an amazingly simple solution, of which Congress and the president apparently are not aware.
Don’t spend the money in the first place. Eschew new programs. Say no to special interests. Let taxpayers keep more of their own money.
This approach would seem to make sense at any time. But especially today, with the federal government facing a deficit approaching $2 trillion in 2009.
Didn’t Nancy Reagan lecture us to “just say no”? We should invite her back for a return tour of Washington, only she should talk about federal spending this time.
New at Cato
Here are a few highlights from Cato Today, a daily email from the Cato Institute.
- Dan Ikenson and Scott Lincicome argue in a new study that restoring the pro-trade consensus must be a top priority for the Obama administration.
- In the DC Examiner, Gene Healy discusses Obama’s first 100 days and argues that he’s massively expanded the power of government in a short period of time.
- In the Asia Times Online, David Isenberg discusses private security contractors in the war in Iraq.
- Watch Patrick J. Michaels discuss energy on CNBC.
- In Tuesday’s Cato Daily Podcast, Peter Van Doren discusses the interaction between Congress and regulators on the issue of food safety.
New at Cato
Here are a few highlights from Cato Today, a comprehensive daily email from the Cato Institute. You can subscribe, here.
- In a new study, “NATO at 60: A Hollow Alliance,” Ted Galen Carpenter argues that NATO has outlived whatever usefulness it once had.
- Doug Bandow weighs the usefulness of NATO in the American Spectator.
- David Isenberg discusses the use of private military and security contractors in war for United Press International.
- Timothy Lynch and Ilya Shapiro take on illegal searches in a legal brief submitted to the Supreme Court.
- In Monday’s Cato Daily Podcast, Dambisa Moyo, author of Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa, discusses the failure of government aid to Africa.
Week in Review: ‘Saving’ the World, Government Control and Drug Decriminalization
G-20 Summit Agrees to International Spending Plan
The Washington Post reports, “Leaders from more than 20 major nations including the United States decided Thursday to make available an additional $1 trillion for the world economy through the International Monetary Fund and other institutions as part of a broad package of measures to overcome the global financial crisis.”
Cato scholars Richard W. Rahn, Daniel J. Ikenson and Ian Vásquez commented on the London-based meeting:
Rahn: “President Obama of the U.S. and Prime Minister Brown of the U.K. will be pressing for more so-called stimulus spending by other nations, despite the fact that the historical evidence shows that big increases in government spending are more likely to be damaging and slow down recovery than they are to promote vigorous economic expansion and job creation.”
Vásquez: “The push by some countries for massive increases in spending to address the global financial crisis smacks of political and bureaucratic opportunism. A prime example is Washington’s call to substantially increase the resources of the International Financial Institutions… There is no reason to think that massive increases of the IFIs’ funds will not worsen, rather than improve, their record or the accountability of the aid agencies and borrower governments.”
Ikenson: “Certainly it is crucial to avoid protectionist policies that clog the arteries of economic recovery and help nobody but politicians. But it is also important to keep things in perspective: the world is not on the brink of a global trade war, as some have suggested.”
Ikenson appeared on CNBC this week to push for a reduction of trade barriers in international markets.
With fears mounting over a global shift toward protectionism, Cato senior fellow Tom Palmer and the Atlas Economic Research Foundation are circulating a petition against restrictive trade measures.
Obama Administration Forces Out GM CEO
President Obama took an unprecedented step toward greater control of a private corporation after forcing General Motors CEO Rick Wagoner to leave the company. The New York Post reports “the administration threatened to withhold bailout money from the company if he didn’t.”
Writing for the Washington Post, trade analyst Dan Ikenson explained why the government is responsible for any GM failure from now on:
President Obama’s newly discovered prudence with taxpayer money and his tough-love approach to GM and Chrysler would both have more credibility if he hadn’t demanded Rick Wagoner’s resignation, as well. By imposing operational conditions normally reserved for boards of directors, the administration is now bound to the infamous “Pottery Barn” rule: you break it, you buy it. If things go further south, the government is now complicit.
Wagoner’s replacement, Fritz Henderson, said Tuesday that after receiving billions of taxpayer dollars, the company is considering bankruptcy as an option. Cato scholars recommended bankruptcy months ago:
Dan Ikenson, November 21, 2008: “Bailing out Detroit is unnecessary. After all, this is why we have the bankruptcy process. If companies in Chapter 11 can be salvaged, a bankruptcy judge will help them find the way. In the case of the Big Three, a bankruptcy process would almost certainly require them to dissolve their current union contracts. Revamping their labor structures is the single most important change that GM, Ford, and Chrysler could make — and yet it is the one change that many pro-bailout Democrats wish to ignore.”
Daniel J. Mitchell, November 13, 2008: ”Advocates oftentimes admit that bailouts are not good policy, but they invariably argue that short-term considerations should trump long-term sensible policy. Their biggest assertion is that a bailout is necessary to prevent bankruptcy, and that avoiding this result is critical to prevent catastrophe. But Chapter 11 protection may be precisely what is needed to put American auto companies back on the path to profitability. Bankruptcy laws specifically are designed to give companies an opportunity — under court supervision — to reduce costs and streamline operations.”
Dan Ikenson, December 5, 2008: “The best solution is to allow the bankruptcy process to work. It will be needed. There are going to be jobs lost, but there is really nothing policymakers can do about that without exacerbating problems elsewhere. The numbers won’t be as dire as the Big Three have been projecting.”
Cato Links
- Is Portugal an example for the future of drug policy? Cato released a new case study this week by Salon writer Glenn Greenwald entitled, “Drug Decriminalization in Portugal: Lessons for Creating Fair and Successful Drug Policies.”
- As the North Atlantic Treaty Organization celebrates its 60th birthday, there are signs of mounting trouble within the alliance and increasing reasons to doubt the organization’s relevance regarding the foreign policy challenges of the 21st century. In a new study, Cato scholar Ted Galen Carpenter argues that NATO’s time is up.
- Should immigration agents target businesses knowingly hiring illegal immigrants? Cato scholar Jim Harper weighs in on a Fox News debate.
- Cato scholar Gene Healy warns, “Beware of the Cult of Obama,” in this week’s Washington Examiner column.
- Sign up today for Cato University 2009: Economic Crisis, War, and the Rise of the State.
Corruption Rewarded in Government
In Downsizing the Federal Government, I discussed some of the corruption surrounding former Senator Ted Stevens:
Another example of abuse engineered by Senator Stevens involves Alaska Native Corporations. Because of rule changes slipped in by Stevens, these shadowy businesses based in his state are allowed to circumvent normal federal procurement rules and win no-bid contracts. The result of such loopholes is that taxpayers do not get value for their money. For example, in 2002 a half billion dollar contract for scanning machines at U.S. border crossings was given to a native corporation with little experience in the technology, instead of established leaders in the field who were not allowed to bid.
The Washington Post did a good job of bringing the scandal of ANCs to light a few years ago. Did the spotlight on ANCs and connections to disgraced Senator Stevens convince Congress to move ahead with reforms? Hardly. From Government Executive today:
In fiscal 2008, companies owned by Alaskan regional and tribal corporations earned a record $5 billion in federal contracts, nearly 10 times the $506 million they earned in fiscal 2000 … ANCs earned two-thirds of the $24 billion they accumulated in prime contracts since fiscal 2000 through the Small Business Administration’s 8(a) Business Development program … Federal acquisition specialists said the data shows that the program, which was designed to help small and disadvantaged companies, has been undermined by a system that rewards companies that earn hundreds of millions in annual revenue.
In the story, Steven Schooner, of George Washington University, summed up the scam well: “The ANC program, as currently implemented, is a blunt instrument that distorts the procurement system, injects well-founded cynicism into the process, and reinforces the belief that government procurement is more about allocating political spoils than ensuring that the government receives value for taxpayer money.”
President Obama has promised procurement reform. He could start be eliminating ANCs and other forms of procurement favoritism.
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